1.3.

6 Cost
Cost is defined as the money expenditure incurred by the producer to purchase (or hire)
factors of production and raw materials to produce goods and services. The total expenses
incurred by a firm in producing a commodity are generally termed as its economic costs.
Economic costs are generally referred to as production costs as well.

TYPES OF COST

The types of cost are as follows:

(a) Fixed cost

(b) Variable cost

(c) Total Cost

(d) Explicit cost

(e) Implicit cost

(f) Marginal Cost

(g) Opportunity Cost

(a) Fixed Cost - It is the cost of fixed factors of production. Fixed Cost remains the same in the
short run. Fixed cost is also defined as the expenditure, on hiring or purchasing of fixed
factors or inputs, which are compulsory and has nothing to do with the amount of
production of the good or service. Fixed costs are the costs that do not vary with the
output.

Examples: Rental value of Land, Machine, interest, insurance premium, salaries of

permanent employees, Depreciation etc.

(b) Variable Cost – Variable cost is the cost of variable factors of production. Variable Cost
increases with the increase in the quantity of production. These are the expenses incurred on
the variable factors of production. Variable cost also can be define as the expenditure on
variable factors or inputs, such as labour, which can be changed.
 Examples: Expenses on raw materials, power and fuel; wages of daily labourers,
etc.

(c) Total cost: Total cost is the sum of total fixed cost and total variable cost.

TC = TFC + TVC
where,
TC = Total cost
TFC = Total Fixed cost
TVC = Total variable cost

It should be noted that total fixed cost is the same irrespective of the level of output.
Therefore a change in total cost is influenced by the change in variable cost only.
Briefly we can say that,
 Fixed cost remains the same at all levels of output.
 As the output increases, TC and Variable Cost increases.

The relationship between total fixed cost, total variable cost and total cost will be clear
from the following figure:
 Difference
between
Fixed Costs
and
Variable
Costs

Fixed Costs Variable Costs

 a. Fixed costs remain constant with a. Variable costs vary with the
quantity of output. quantity of output.

b. They are related with the fixed b. They are related with the variable
inputs. inputs.

c. They do not become zero. They
remain same even when production is
stopped.
d. A firm can continue production
costs are not recovered even fixed
costs.
c. They can become zero when
production is stopped.
d. Production should at least recover
the variable cost.

(d) Explicit cost

The rent and wages paid by the farmer and the expenditure on raw materials or inputs
incurred by him are also called explicit cost. Explicit cost is defined as the money
expenditure incurred by the producer on both fixed and variable factors of production and
raw materials etc. These are direct payments and are properly calculated and recorded
separately. These are actual money expenses directly incurred for purchasing the
resources.

For examples - Cost for inputs or raw materials and power, wages to the hired workers,
rent for the factory-building, interest on borrowed loan, expenses on transport,
advertisement, publicity, etc.

(e) Implicit cost

Implicit cost is the cost of self supplied factors. Besides purchasing factors of
production and raw materials, the producer also has his own factors and materials for
producing goods and services. For this he does not pay any money to himself. Besides
purchasing resources from other firms, a producer uses his own factor-services also in the
process of production. He generally does not take into account the costs of his own
factors while calculating the expenses of the firm.

For example, rent of own land, interest on his own Investment and salary for his own
services as manager, wages for his and his family member contribution etc.
(f) Marginal Cost (MC) — Marginal cost is the increase in total cost resulting from one
unit increase in output. If the producer wants to increase output, extra units of labour
along different inputs is needed. Extra units of labour will lead to extra expenditure on
wage paid to the labour. As a resulting wit the total cost of production will increase. In
short, increase in total output will lead to increase in total cost of production. Marginal
cost is defined as increase in the total cost due to increase in one extra unit of output.

The marginal cost curve is given below:

The marginal cost curve is ‘U’ shaped and is determined by the law of variable
proportions. If increasing returns is in operation, the marginal cost curve will be
declining, as the cost will be decreasing with the
increase in output. When the diminishing returns are
in operation, the MC curve will be increasing as it is
the situation of increasing cost.

Opportunity Cost Principle

The concept of opportunity cost occupies a very important place in modern economic
analysis. Factors of production are scarce in relation to wants. Opportunity cost is the cost
of the next-best alternative that has been forgone. The opportunity cost is the cost of
something in terms of an opportunity forgone (and the benefits that could be received
from that next opportunity). In other words, the opportunity cost of an action is the value
 of next best alternative forgone. Choices are mostly made on the basis of opportunity cost
of alternatives.

About opportunity cost we can conclude following points:

i. Opportunity cost is the cost of the next-best alternative that has been forgone.
ii. The opportunity cost of a good should be viewed as the next-best alternative good that
could be produced with the same value of the factors which are almost same.

Let us consider an example to understand the concept of opportunity cost. Suppose a

piece of land can be used for growing wheat or rice. If the land is used for growing rice, it
could not available for growing wheat. Therefore the opportunity cost for rice is the
wheat crop foregone. Here next best alternative for rice is wheat cultivation.

(Source: Fundamental of economics and Management, 2014)

Suppose the farmer, using a plot of land that can either produce 50 quintals (ON) of rice
or 40 quintals (OM) of wheat. If the farmer produces 50 quintals of rice (ON), he cannot
produce wheat. So the opportunity cost of 50 quintals (ON) of rice is 40 quintals (OM) of
wheat. Any combination of the two crops could be produced by farmer that is production
possibility curve MN. Let us consider that the farmer is operating at point A on the
production possibility curve where he produces OD amount of rice and OC amount of
wheat. Now farmer decides to operate at point B on the production possibility curve.
Here farmer has to reduce the production of wheat from OC to OE in order to increase
the production of rice from OD to OF. It means the opportunity cost of DF amount of
rice is the CE amount of wheat.

Law of Equimarginal Returns

Which enterprises or combination of enterprises gives the highest income? Such an

optimum choice of enterprises can be made based on the principle of equimarginal
returns. Profit will be the greatest if each unit of input is used where it adds the most to
the returns. Generally, the farmer has limited resources, e.g., land, labour and capital.
Farmers can use them only on few crops or enterprises. He can select an optimum
combination of enterprises based on principle of equimarginal returns. A limited amount
of variable input is maximized when that input is used in such a way that marginal return
from that input equal in all the enterprises.
The law of equimarginal returns is concerned with the allocation of the limited amount of
resources among different enterprises. The law sates “profits are maximized by using a
resource in a such a way that the marginal returns from that resources are equal in all
cases”. The law of equimarginal return states that profit from a limited amount of
variable input is maximized when that input is used in such a way that marginal return
from that input is equal in all the enterprises.

For e.g farmers has Rs. 3000 for cultivation of Rice, Wheat and Maize. Ha can allocated
amount in a such a wat that marginal returns from all enterprises are maximum and same.

Marginal Returns
Amount Rice Wheat Maize
500 800 750 650
1000 700 650 620
1500 650 620 530
2000 600 580 500
2500 500 430 480
3000 400 380 420
Total returns 3650 3410 3200
Net profit 650 410 200
 Commodity Marginal Returns

Rice 800

wheat 750

Rice 700

Rice 650

Wheat 650

maize 650

Total returns 4200

Net profit 1200

So Farmers should allocate Rs 1500 on Rice, Rs 1000 on wheat and Rs 500 on maize to
maximize the profit.

FARM PLANNING AND BUDGETING

 Farm Planning
A plan is typically any diagram or list of steps with timing and resources, used to achieve
an objective.
Planning means the creation of plan; it can be as simple as making a list. Planning is the
process of thinking about and organizing the activities required to achieve the desired
goal.
A farm plan is an image or map of the farm of the desirable situations. The farm plan
presents the overall situations of the farm, including farm objectives, and expected cost
and benefits.

Characteristics of good farm plan

 It should be clearly written and well organized
  It should present efficient use of farm resources such as labor, power, equipment
etc.
 The plan should have balanced combination of enterprises- Production of
different crops, maintain and improves soil fertility, optimum use of inputs
throughout the year
 Avoids excessive risks
 Provides flexibility
 Utilize the farmers knowledge, training and experience, and take the account of
farmers interest.

Farm planning and Farm Budgeting

Farm Planning

Farm planning is a process of making decision regarding the organization and operation of a
farm business so that it results in a continuous maximization of net returns of a farm business.
Farm planning is a process of deciding in the present what to do in the future about the best
combination of crops and livestock to be raised through the national use of resources in a such
way that to increase the resource use efficiency and the farm income.

Objective of farm planning

The ultimate objective of farm planning is the improvement in the standards of the living of the
farmer and his/her family. The immediate objective of the farm planning is to maximize the net
income of the farmer through improved use planning- maximization of the annual net income
sustained over a long period of time.

How does farm planning helps to farmers?

Farm planning helps the famers to do the following things in the organized ,systematic and
effective way.

 Assess the farm business and environment in which it operates

 Identify the goals of farm business- what the farmers wants to accomplish
 Gathers ideas on the alternative methods/practices which might be useful to the farmer in
his farming business
 Analyze the performance of the farm business
 Identify the farm resources
  Take decision in relation to selection of crops, area under different crops and the number
of livestock to be maintained.
 Identify the inputs and credits needs of his alternative improved plan
 Estimate the future costs and returns – give farmer an idea of the expected net income
 Enable the farmer to achieve his objectives in relation to his farm and family in a more
organized manner.
 Evaluate the farm plan -whether it is working.

1. Simple farm planning : it is adopted either for a part of the land or for one enterprise or to
substitute one resource to another. This is very simple and easy to implement. The
process of change should always begin with these simple plans
2. Complete or whole farm planning : This is the planning of the whole farm. This planning
is adopted when major changes are anticipated in the existing farm business. Whole farm
planning ties the entire planning farmer does together for the whole farm.

Farm Budgeting

Budgeting is the process of preparing the advance estimates of finance to plan before putting it
into effect. The budget is a statement of estimated income and expenditure. Farm budgeting is
the process of estimating costs, returns and net income of a farm or a particular enterprises.

Objectives of farm budgeting

 To serve as a basis of farm pan preparation and its evaluation

 To help farmer in adopting the farming methods in meeting market demand, which can
give higher returns on his investment?

Applications of the farm budgets

 Application prior to the crop season : The major use of a farm plan prior to the beginning
of a season is to outline the work, indicating planned organization and operational
practices from standard point of management principles
  Application during the farming season : A farm plan is best used during the operations as
a flexible guide to operate the farm business. To the efficient farm manager, a farm plan
serves as a compass to keep the operator on a right track.
 Application at the end of the season : The analysis of the estimated results as compared
with actual results from each enterprise and the entire farm business as a unit serve to
make future plans more effective. The analysis determines the strong and weak points of
the business, which helps in planning for improving the efficiency and increasing net
earnings.

Importance/ advantages of farm budgeting

 It helps in analyzing business carefully

 It helps in preparing statements of receipts and expenditure
 It evaluates the old plan and guides the farmer to adopt a new plan with advantage
 It makes famers conscious about the wastage in the farm business
 It guides and encourages the most efficient and economical use of available resources
 It serves as the basis for future improvements in the farm management practices

Types of farm budgeting

There are 3 types of farm budgeting as Partial budgeting, Enterprises budgeting and complete
budgeting

1. Partial budgeting
Partial budgeting refers to estimating the costs and returns from a part of a business or a
particular enterprise. Partial budgeting analysis is simple, quick and easy. Partial budgets
are commonly used to estimate the effects or outcomes of possible adjustments in the
farm business. Partial budgeting may be desired, for example to estimate additional costs
and returns from growing one hectare of hybrid maize in place of local maize.

2. Enterprise budgeting
An enterprise is defined as the single crop or livestock commodity that actually produces
a marketable product. An enterprise budget is a listing of all estimated income and
expenses associated with a specific enterprise. Enterprise budgets are used to estimate
inputs required, costs involved and expected returns from a particular enterprise.
Enterprise budgets can be organized and presented in several different formats, but the
typically contain three sections as i) income, ii) Variable or operating expenses and iii)
 Fixed expenses. Several kinds of data are necessary for budgeting an enterprise, which
include input data, output data, and prices of inputs and outputs

3. Complete budgeting
Complete budgeting is also called total budgeting. Complete budgeting refers to making
out plan for the farm as a whole. Complete budgeting considers all the crops, livestock,
methods of production and aspects of marketing which estimates costs, returns for the
farm as a whole. Complete budgeting can be specifically estimate the probable income
and expenditure in the farm. Complete budgeting brings about progressive changes in
income, draws the attention to a variety of factors affecting farm income.
Difference between partial budgeting and complete budgeting

S.N Partial budgeting Complete budgeting

.

1 It is adopted when a minor aspect The whole farm is considered as one unit
of farm management is considered.

2 It always treats minor change- net It account for drastic change in the
effects in term of costs and returns organization or an operation of farm

3 It is practiced within the existing All the aspects like crops, livestock,
resource structure of the farm machinery and other assets are
considered.

4 Only consider a few alternatives All the available alternatives are

considered.

5 Variable costs are considered for Both fixed and variable costs are
working out costs and returns calculated in working out costs and
returns

6 It is simple and requires relatively It is complex and requires more efforts

less effort and time for preparation and time for preparation

Steps in farm planning and budgeting

  Specification of the technical coefficients of productions
 Specifications of appropriate prices
 Preparation of enterprise profitability chart
 Preparation of the farm plan
 Inventory preparation
 Examine the existing farm plan
 Locate the weakness of the existing farm plan
 Lost out the risks of agriculture production
 Prepare the alternatives plan
 Analyze the alternatives plans to check the profitability and practicability of a particular
plan
 Implementing the plan

Production Planning in Agribusiness

Risk and Uncertainty

Risk is the potential of gaining or losing something- a chance that an investments actual return
will be different than expected. Under risk, the occurrence of future events can be predicted by
specifying the level of probability. The dispersion of possible outcomes such as gains or losses
can be estimated when a particular course of action is followed.

Uncertainty

Uncertainty means lack of certainty. It is the situation which involves imperfect and or unknown
information. A state of having limited knowledge where it is impossible to exactly describe the
existing state, or a future outcome. In case of uncertainty, the occurrence of the event cannot be
quantified with the help of probability.
 BASIS FOR
RISK UNCERTAINTY
COMPARISON

Meaning The probability of winning or Uncertainty implies a situation

losing something worthy is where the future events are not
known as risk. known.

Ascertainment It can be measured It cannot be measured.

Outcome Chances of outcomes are known. The outcome is unknown.

Control Controllable Uncontrollable

Minimization Yes No

Probabilities Assigned Not assigned

Types of Agriculture Risk

1. Production and technical risk

2. Price and market risk
3. Institutional and policy risk
4. Personal risk

Management of Agriculture Risk

 Insurance
 Forward contracts
 Diversification
 Selecting less risky technologies and less risky enterprises
 Flexibility

Steps of Risk Management

a. Identification of risky events
b. Anticipation of the probable outcomes and their consequences
c. Taking action to obtain a preferred combination of risk and expected returns
d. Restoring the capacity of the firm to implement future risk planning strategies.

Measurement of Risk

The dispersion of possible outcomes such as gains or losses can be estimated when a
particular course of action is followed. Various tools can be used to measure the risk. The
standard deviation of the distribution can be best measure the risk, when possible, outcomes
are normally distributed.

Standard deviation
Where, x=observation, X bar= mean of observations, N= number of observations
Note: Higher the standard deviation of the expected outcomes, higher would be the risk
Risk bearing: when a person estimates the risk and implement the project/ business by
accepting that amount of risk, then he is bearing the risk. The person who accepts the risk
and run the business then he is risk bearer.
Risk averting:
Attempt all the questions

1.What is Farm Management? The major goal of the farm management is profit maximization.
Explain with suitable examples

2.What are the major objectives of farm budgeting? Differentiate between Complete and Partial
budgeting.

3. What is value chain approach in agriculture? How does value chain analysis create
competitive advantage in High Value crops?

4. What do you mean by agribusiness Management. Describe the opportunity and

management system for good Agribusiness environment.

5. Differentiate between:

a. Complementary product vs supplementary Product

b. Risk Vs Uncertainities

c. Farm Vs Firm

6. write short notes on

a) Isocost line
b) Income statement
c) Competitive products
d) Principle of substituition
e) Financial analysis
f) Opportunity cost

7. What is Isoquant? How is the least cost combination determined? Explain with suitable
examples.

8. Explain

a) Product- Product relationship

b) Factor- Factor relationship
c) Factor- Product relationship
Farm Inventory and Record Keeping Credit hours 7

Objectives

Develop the skills farm record keeping

Familiar with calculation of depreciation of farm machinery and

Develop the knowledge of preparing balance sheet, income statement and cash flow
statement

Income statement

Income statement is the summary statement of revenue and expenditure together with net
profit or net less during given period of time

- Situation of revenue and expenditure

- Income statement positive profit
- Income statement negative loss
1. Income (receive per unit of time) = Sales + other Income= Sum of Mp* Pm+ Bp*Pb
- Where Mp= Quantity of main Product
- Pm= Price of main Product
- Bp= By product
- Pb= Price of by product
2. Cost of goods sold (variable cost)
3. Gross Income (1-2)
4. Advertisement and selling cost=
5. Profit before Depreciation, Interest and Tax
6. Depreciation
7. Profit before Interest and Tax (5-6)
8. Interest
9. Profit before tax (7-8)
10. Tax provision
11. Profit after tax (9-10) (Net Profit)

Uses of Income statement

a) To analyze the tax repayment ability
b) To satisfy the loan repayment ability
 c) To evaluate the outcome of business activity
d) To evaluate the expansion potentiality
e) To reveals the success or failure of farm business over the period of time

Analysis of Income statement

Gross profit= Income – cost of goods sold (variable cost)

Net profit= Income- All cost ( Total Cost= Fixed cost + variable cost)

Return on Investment= Net profit/ Total Investment (ROI)

Fixed cost= 2 lakh

Variable cost= 50 thousands

Income= 3 lakh

ROI= ?

(3-2.5)*100/ 2.5= 20%

Income statement of Livestock Farm (2077/78)

Particulars Amount Rs. Amount Rs.

1. Sales revenue 10,00,000

2. Cost of goods sold 7,00,000

(VC) variable cost

3. Gross Profit 10,00,000-7,00,000 3,00,000

4. Operating cost
expenses

4.1 Salaries 40000

4.2 Rent 20000

4.3 Interest 10000

4.4 Depreciation 5000

4.5 Administration 50000

4.6 Transportation 30000

4.7 Other expenses 80000 (163000) (sum of operating

cost)

5. Profit before Income 300000-163000 137000

Tax

6. Income Tax 6000

7. Net Profit after tax 137000-6000 131000 Net Positive

8. Return on (131000*100)/ 15.074%

Investment (700000+163000+ 6000)

Farm Records and accounts

Farm Bookkeeping is known as a system of records written to furnish a history the business to
its financial side. Farm records are systematic records of all activities and transaction regarding
all aspects of farm operations. Farm accounting , on the other hand, is the extraction and
analysis of the farm records for the purpose of determining the assets and financial situations of
the farm at a particular period of time. Farm accountancy is the science of recording in books
business transactions on a regular and systematic manner so that their nature, extent and
financial effects can be readily ascertained at any time of the year.
Reasons for farm keeping farm records
1. Farm records are used to evaluate the performance of any farm or farm enterprises
within the given period of time
2. Farm records are an aid to managerial control.
3. Farm records provides figures for farm planning and budgeting.
4. Farm records tell a farmer how much he is earning.
5. Farm records tell the farmer where he is gaining progressively or loosing
6. Farm records enable the farmer obtain loans from bank and other financial instituitions.
Advantages of farm records and accounts

1. Means to higher income: To obtain higher income, farmers must have exact knowledge
about present and potential gross income and operating costs.
2. Basis for diagnosis and planning
3. Way to improve the managerial ability of the farmer
4. Basis for credit acquisition and management
5. Guide to better home management
6. Basis for conducting research in agriculture economics and production economics
7. Basis for government policies

Characteristics of farm records and accounts

1. Simple and easy to understand

2. Suitable forms for recording the type of information the farmer wants to record.
3. Ample space in each section for all the entitites that is likely to be recorded
4. Adequate instructions for recording and analysis of the recorded data.

Types of Farm Records

 Physical Farm records (Farm map, soil map, contour map, land utilization record, crop
production and livestock production and disposal record, machinery use record)
 Financial records (Cash register, credit sale/purchase register, wage register, non-farm
income record)
 Expenditure and Income records
 Supplementary/special records (sales record, price records, marketing rrds)
 Farm Inventory
Farm inventory is a list of the physical properties (assets) along with their values that a
farm owns at a particular date. Farm inventory includes the listing of physical assets
along with the values of such assets. Assets here refer to all materials owned by the
farmer and used in the production process. All the physical aspects of the operation of the
farm business like land, buildings, Machinery, livestock records, poultry records, records
of standing crops, etc are all the farm inventory, where farm records the physical quantity
(i.e. physical property of the farm). Inventories are generally taken twice a year- at the
beginning and at the end of the year.

Purpose of Making Inventory

 A complete farm inventory, taken at a specific date, gives a list of all the assets with their
values. It shows what amount of capital accumulation in the business.
 It helps to work out the value of last year takes over of stocks and this year left over.
 It enables the farmer to work out the measure of income.
 It enables to determine the depreciation costs.

Process of preparing the farm inventory

There are 2 steps involved in preparing farm inventory.

1. Examination of physical assets: Physical records which involve a listing of the assets of
the farm, e.g. land, buildings, equipment, livestock, supplies etc.
2. Valuation of physical assets: Each of the listed items should be valued using an
appropriate valuation method.

Valuation Methods

 Valuation at cost or market price , whichever is lower

 Valuation at a net selling price. This method is used for assets that would be sold within
the year
 By Depreciation method
 Valuation by reproductive value or replacement cost.
Depreciation
The vehicles, equipment, machinery and other similar assets, all lose value over time as a
results of usage and age. The loss in value is called depreciation.
Depreciation is a decline in the value of a given assets as a result of the use, wear, and
tear, accidental damage and time absolescence.
Different assets depreciate at different rates. The amount of depreciation charged should
correspond to the loss in the value of the asset over time. Assets that have a relatively
long useful lifetime, such as machine, equipment, etc depreciate slower than assets like
office equipment, computers, furniture, etc. which need to be replaced more often and
therefore depreciate more quickly.
The most common methods of computing depreciation are:
1. Annual Revaluation
Annual revaluation implies estimating the market value of the assets at the
beginning and the end year (inventory results) and then taking the difference as
depreciation.
2. Straight line method
Depreciation can be calculated on a staright line basis. Here, the life of the asset is
estimated and its cost minus its salvage value at the end of its working life, is
divided by the number of years of its life to get the annual depreciation. This
method is more useful for the durable assets like building and fences that may
require uniform maintenance during their life.
The total depreciation is the purchased price of the item minus the junk value (or
salvages value or scrap value or residual value). By this method, depreciation can
be calculated as;
Annual Depreciation: (Purchase price of the asset -Junk Value)/Expected life

Suppose a Tractor cost NRs. 10,00,000 when new and expected to last 10 years.
The junk value of the tractor after 10 years would be 1,00,000. Then the annual
depreciation would be
Annual Depreciation: (10,00,000-1,00,000)/10 = NRs. 90,000

Diminishing balance method

Sum of the years digits method or reducing fractions method
3. Diminishing Balance method
A fixed rate of depreciation is used for every year and applied to the value of the
asset at the beginning of the year.
Annual depreciation is calculated by this method at the rate of 20% for a machine
costing NRs. 10,00,000. The result can be as

Value At the beginning Annual depreciation Remaining Balance

of the year

1st year 20% of 10,00,000 10,00,000-2,00,000

= 2,00,000 = 8,00,000

2nd year 20% of 8,00,000 8,00,000- 1,60,000

=1,60,000 =6,40,000

3rd year 20% of 6,40,000 6,40,000-1,28,000

=128000 =5,12,000

4th year 20% of 5,12,000 5,12,000- 1,02,000

=1,02,000 =4,09,000

5th year 20% 0f 4,09,000 4,09,000-81,800

=81,800 = 327,200

This method assumes depreciation is at fixed percentage every year, however the
depreciation amount decreases throughout the year. The asset value goes down
more rapidly in the early years than the later.

4. Sum of the year – digits method

Annual Depreciation = Fraction for any year * Amount to be depreciated

Fraction for any year =

(Year of life remaining at the beginning of accounting period)/ (sum of the years
of the life of the best asset)
 Fraction for the 1st year= 10/(1+2+3+4+5+6+7+8+9+10)= 10/55
Fraction for the 2nd year= 9/(1+2+3+4+5+6+7+8+9+10)= 9/55
Fraction for the 10 year= 1/55
Amount to be depreciated = (Purchase price of the asset- salvage value).

The sum of the years digit method has some advantages over the diminishing
balance method because he no undistributed balance is left over. By this method,
the annual depreciation is found out by multiplying a fraction time by the amount
to be depreciated (cost minus Salvage)

Production Planning in agribusiness

Objectives
Familiar in production planning in agribusiness
Understanding of risk and uncertainty

Production: It is the process of converting resources to output with the help of technology

Production Plan: It is a blue print which seeks the answer of the following question

1. What to produce?
2. How much to produce?
3. T0 whom it is to be produced?
4. How to produce?
5. Where to produce?
6. When to produce?

Production Planning: It seeks to process of preparing blue print (i.e., Production plan) which
seeks answer the following question.

 What to produce
Determined by price level of commodity in economy and number of potential buyers
which is depend on demand
 How to produce?
 Depend on type of technology
 Where to produce?
Depend on comparative advantage (grow where those MR is higher, for examples,
Fruits> Cereals in context to Nepal, Rice>soyabean in irrigated region). Agriculture
export zone, Mustang and Jumla for Apple, Illam for tea and high mid Himalayas for
Livestock.
Produced in those places where there is either low/no transportation cost and minimize
transportation cost.
 How much to produce?
Depend upon demand and supply scenario
 When to produce?
 For whom to produce?

Steps of production Plan

 Planning
 Routing
 Scheduling
 Dispatching (production process)
 Follow-up ( Monitoring & Evaluation)

Cooperatives

Concept and development of cooperative

Cooperative:
1844 : Cooperatives (British)
2010: Department of cooperative
2013 chaitra 20 Shree Bakhan Multipurpose Cooperative limited
2048 = Sahakari aayan Coopeartives ACT
2049 + Cooperatives Regulations
2050= Rastriya sahakari Sangh
Types of cooperatives
Retailers cooperatives
Workers cooperatives
Volunteer coopeartives
Social cooperatives
Consumers cooperatives
Business and Employment cooperatives
New generation cooperatives
Housing cooperatives
Utility cooperatives
Agriculture cooperatives

A cooperative is a private business organization that is owned with a common bond of interest and
controlled by the people who use its products, supplies or services. Although cooperatives vary in type
and membership size, all were formed to meet the specific objectives of members, and are structured to
adapt to member's changing needs. Cooperatives are formed by individuals who coordinate among
themselves (horizontal coordination) to achieve vertical integration in their business activities.

Subsequent Development in Cooperative in Nepal:

About Sixty years, the Bakhanpur co-operative is active and so is the co-operative movement of the
country. During that time, the movement has been through many vicissitudes.

Initially co-operatives were looked upon as a means of delivering official assistance, especially farm
credit, to the people. Soon after the first elected government of the country took office in 1958, co-
operatives were envisaged operating as democratic organizations and serving their membership in various
ways. Promulgated in 1959, the country's first Co-operative Act was designed to foster co-operatives in
line with the principles of Co-operation.

But in 1960, the popular government was unceremoniously removed from office by the King who then
imposed the party less Panchayat rule. This new idea of government was said to have been based on class
co-ordination and the co-operative was to form the backbone of the Panchayat economy. Politicization of
co-operatives was followed by officialization. Despiteof incessant efforts and occasional campaigns for
expansion and consolidation, such as the Sajha (or the co-operative) program of 1976, the movement
could not gain the desired momentum. Just as the political system was imposed against the will of the
people.

The popular movement of 1990 reinstated multi-party democracy and the free market-like environment of
the 1990s was congenial for co-operatives. To encourage co-operative work among the masses, a new Co-
operative Act was made in 1992 by repealing the existing legislation. The new law recognized co-
operatives as organizations to be formed by the people of their own free will and to be self-regulated
according to the principle of member democratic control. Also, 2015 Constitution of Nepal has envisaged
a distinct co-operative sector in the national economy. In addition, co-operative development is
constitutionally a function to be shared between and also to be discharged separately by the three levels of
government in the federal structure.

The deregulating effect has all along been more quantitative than qualitative. Thus, the genuineness of
many co-operatives has been called into question. There have been cases of co-operatives being misused
by unscrupulous directors.

Ensuring 'Co-cooperativeness' is therefore a priority. Part of the solution is to be found in co-operative-

friendly or rather co-operative member-friendly regulation. Accordingly, the 2017 Co-operative Bill
provides for corrective regulation for self-regulatory processes of the fail co-operative.

1.1.1 Characteristics and principle guidelines of cooperative

Characteristics of Cooperative:
1. Voluntary association and open membership:
It is voluntary association in which membership is open for all people with common interest.
People can come together to satisfy the needs with common effort. In Nepal at least 25 members
are required for establishment of cooperative organization.
2. Equal voting right:
It is based on democratic principle. It is based on equality of status of all members. Decisions and
other bills are passed on the basis of majority votes.
3. Democratic management:
Management is always in democratic lines. All member of organization elects its managing
committee. One man can give only one vote. Managing committee will then work for common
benefit of all members.
4. Service motive:
Its objective is to provide service to member. It’s not profit motive. Its aim is not to earn
maximum profit as in all form of organization. Even though it can earn profit by extending their
services to non-members but they collectively work for service.
5. Legal existence:
In Nepal, these types of organizations are established under cooperative act. There must be at
least 25 members and they all must be guided through common objective
6. Cash transactions:
In this type of organization transactions are done only through cash. There are no credit
transactions. It eliminates bad debt too.
7. Disposal of surplus:
It is service motive. Even though it can make surplus, the surplus amount is used for extending
the surplus facility.
8. Education:
The success of organization depends upon the education of its members. They should be
constantly educated with objectives.
9. Liability:
Liability of member is limited. It should use the word “ltd” after its name.
10. Government control:
The organization must follow the rules and regulations of the government.

Principles of Cooperative:
Cooperatives around the world generally operate according to the same core principles and values,
adopted by the International Co-operative Alliance in 1995. Cooperatives trace the roots of these
principles to the first modern cooperative founded in Rochdale, England in 1844.
 1. Voluntary and Open Membership:
Cooperatives are voluntary organizations, open to all people able to use its services and willing to
accept the responsibilities of membership, without gender, social, racial, political or religious
discrimination.
2. Democratic Member Control:
Cooperatives are democratic organizations controlled by their members those who buy the goods
or use the services of the cooperative who actively participate in setting policies and making
decisions.
3. Members’ Economic Participation:
Members contribute equally to, and democratically control, the capital of the cooperative. This
benefits members in proportion to the business they conduct with the cooperative rather than on
the capital invested.
4. Autonomy and Independence:
Cooperatives are autonomous, self-help organizations controlled by their members. If the
cooperative enters into agreements with other organizations or raises capital from external
sources, it is done so based on terms that ensure democratic control by the members and
maintains the cooperative’s autonomy.
5. Education, Training and Information:
Cooperatives provide education and training for members, elected representatives, managers and
employees so they can contribute effectively to the development of their cooperative. Members
also inform the general public about the nature and benefits of cooperatives.
6. Cooperation among Cooperatives:
Cooperatives serve their members most effectively and strengthen the cooperative movement by
working together through local, national, regional and international structures.
7. Concern for Community:
While focusing on member needs, cooperatives work for the sustainable development of
communities through policies and programs accepted by the members.

1.1.2 Cooperative education and role of cooperative in rural

development
Cooperative Education:

Cooperative education is a method of instruction that enables to combine academic classroom instruction
(school-based learning component) with occupational instruction through learning on the job (work-based
learning component) in a career area of choice. Emphasis is placed on the education and employability
skills.

Role of Cooperative in Rural Development:

1. They provide financial assistance to the farmers for buying improved seeds, chemical fertilizers
and agricultural tools and equipment at a low-interest rate in order to increase agricultural output.
 2. They provide financial assistance to the people of rural areas for poultry farming, bookkeeping,
fisheries, horticulture, animal husbandry and promoting cottage and small scale industries.
3. They provide the facilities of warehousing, transportation, processing, grading, packing,
financing, and marketing the products of their members.
4. They develop a feeling of mutual help, co-operation, democracy, unity, brotherhood and equality
which ultimately brings peace and prosperity in the society.
5. They protect their members from the exploitation of capitalist organizations, money leaders and
middlemen which ultimately helps for the betterment of the living standards of people.

A. Learning process and support materials:

The learning process includes the participation of student in group work, presentation and skill
development, creative thinking, written methods etc.

B. Assessment:
Very Short Questions

1. Define Group.
2. Define Cooperative.
Short Questions

1. What are principles of cooperative.

2. What are the characteristics of cooperative?
Long Questions

1. Explain about the procedure of group formation.

2. Explain about the role of cooperative in Agriculture development in Nepal.
GLOSSARY:

Interaction:Interaction is a kind of action that occur as two or more objects have an effect upon one
another.

Membership:The state of being a member.

Organization: An organized body of people with a particular purpose, especially a business, society,
association.
Role of cooperative in Commercial Farming

In Nepal, about 65% of the population depends upon agriculture for their livelihood. The
country as a whole has had a food deficit for the last 26 years, mainly due to subsistence
farming, small and fragmented land holding size, low agriculture inputs and productivity,
uneconomical farming unit and lack of decentralized grass root based agriculture
development policies and program. The imports-to-exports ratio in FY 2017/18
was 15.2 (up from 13.6 the previous year) i.e. Nepal imported $15.2 for every dollar
exported, resulting in a trade deficit of $11.1 billion (up from $8.6 billion the previous
year), which amounts to a staggering 39% of GDP.

Cooperatives have direct and indirect impact on socioeconomic development by promoting and
supporting entrepreneurial development, creative productive employments raising income and
helping to reduce poverty while enhancing social inclusion, social protection and community
building. Cooperatives directly benefit their members. They also offer positive for the rest of
society and have a transformational impact on the economy/

Agriculture cooperatives play an important role in food production and distribution and in
supporting long term food security. Agriculture cooperatives also promote the participation of
women in economic production which in turn help in food production and rural development.
Through cooperatives women are able to unite and provide a network of mutual support to
overcome cultural restriction to pursuing commercial or economic activities. Financial
cooperatives and credit cooperatives or cooperatives banks enable easy access to saving and
credit at low costs.

In Nepal, cooperatives are substantial provider of social and economic protection especially
health, coverage of commercial farming loan.

Organization/Structure
To run NCF/N’s (National Cooperative Federation of Nepal) functions, there are two segments
of management. One segment includes board of director accounts committee, sub committee and
other segment is paid management employees. Both the segments are integrated into one
organization. NCF/N is for the effective and efficient operation of its total management.
 General Assembly

Executive committee Account committee

Advisory Board chairperson Committee and sub committee

chairperson

Senior-vice chairperson

Vice chairperson

General manager

Deputy general manager

General & Finance Women Market business Education & Project &
administrative development & promotion Training development
department department department department department

Manager Manager Manager Manager Senior Manager

Publication &
communication
department

Manager
Formation of cooperatives and its Executive Members

Ministry of cooperatives and poverty alleviation- chairperson

Person nominated by Government of Nepal- Co- chairperson

Chairperson, National cooperative federation- Member

Governor, Nepal Rastra Bank- Member

Secretary, Ministry of finance- Member

Secretary, Ministry of Industries- Member

Secretary, Ministry of cooperatives and poverty alleviation- Member

Secretary, Ministry of Local Development- Member

Representative, National Planning Commission- Member

Registar, Department of cooperatives- Member

Any two persons elected from among the chairpersons of central cooperative unions- Member

Any five persons nominated by Government of Nepal from among cooperators of social workers
from five development regions- Member

Any one from among the women cooperative workers- Member

Any two from among the experts in relevant disciplines- Member

CEO, Agricultural Development Bank- Member

Person nominated by GON- Member secretary